But what are the underlying factors at work in companies that drive the actions we’ve explored so far?
The behaviours we’ll talk about in this chapter are so commonplace that they must — at least partly — be as much built into ourselves as human beings, as into the businesses in which we work. Is there some hardwiring in our brains that means we are predetermined to act in this way? And what forces are at work outside of our own selves that mean we are prevented from doing new things? Let’s break down the forces that compel these ways of acting.
5.1 Inappropriate management techniques
Traditional management focuses on generating repeatable outcomes and ever-increasing efficiency from capital. This obviously isn’t how most managers would describe their jobs but it is the reality about how most businesses operate. As Eric Reis points out in The Lean Startup, this method of organising and operating businesses has been extremely successful, and has allowed organisations to consistently improve profits while reducing headcounts across virtually all industries.
In order to keep the machine running smoothly, managers are incentivised directly based on the returns they can generate (management by results) and focus their actions on resolving issues with underperformance (management by exception). Predictability, therefore, is vital. Experienced managers have learnt that they can improve the performance of their teams with a variety of management techniques, including softer management fads such as neuro-linguistic programming (NLP) or developing a better understanding and consideration of emotional intelligence, but at the core remains a strong emphasis on the setting and measuring of targets. Where targets are met, the managers and their workforce should be rewarded. When targets are missed, souls must be searched, Christmas parties postponed and the spectre of the redundancy scythe may even be invoked. The message is clear. We’ll either have more performance or less cost. And you don’t want to know what ‘less cost’ really means.
This process has been refined over many years, helping us to understand which incentives are most effective, how teams can be structured and how staff should interact. Companies have toyed with many models for incentives and rewards at different levels of the hierarchy. Personal goals are aligned with corporate goals, values are aligned to effectiveness, and so on.
More progressive businesses may have found ways to soften the experience of working in a performance-led management environment, creating a more social contract with employees by allowing for flexible working practices and extending benefits beyond straight-forward financial remuneration. But it is in adversity that we understand the true character of these working relationships. And it is in lean times that most corporates revert to form.
The obvious challenge for companies doing new things is that innovation and new product teams can rarely (if ever) be managed using the same techniques that work so well for running the day-to- day business.
When we set out to create new products, the process will have several phases — none of which should really come as a great surprise but, equally, none of which fits into a traditional management philosophy.
We’ll discuss the process in more detail later on but for the time being assume it follows these four basic stages:
- Learning and context-setting. Even the largest and most long- established companies can benefit from taking a step back from day-to-day operations to understand who the main players in the market are, how innovation might disrupt that market, and how the current products are Typically, companies need to look outside their business for these insights. Ideally, the team that will take on the responsibility for developing new products will have this knowledge and continue to top up that knowledge throughout the project.
- Idea creation. Having understood the context, and learned from other businesses and industries, the first stage in creating a new product, proposition or service is to generate a long list of prospective ideas. This is an area that many companies feel more comfortable with — the brainstorm and its ilk having long-since invaded most corporate
- Testing and developing ideas. A single idea can take many forms. This stage is about working out exactly what sort of proposition you will develop from that idea in the context of your company and your When you’ve done that, you need to prove that your assumptions are correct by validating in the real world that customers will accept and want your proposition and that you have the necessary resources and wherewithal to build and operate it.
Stage three is an area which fits particularly poorly with standard management practice. In fact, all too often, it is simply not done at all. Perhaps the urge to skip this step is because no one wants to have their name attached to a failure.
It is still tough to separate the concept of a negative project outcome from a negative commercial (and, therefore, personal) outcome. So, while the subsequent design phase is made up of higgledy-piggledy complexity and risk, many will find the familiarity of it more comfortable than the uncertainty of discovering the truth in the ideas, and making tough decisions on what you should really be doing.
Yet, this phase is the keystone of the way we believe products should be developed, and we have considerable evidence to show that as a process, it is a critical element to doing innovation well.
To do it requires that corporate leaders must trade in their gut instincts and judgement based on many years of experience for an evidence-based process of validating that products are viable, feasible and desirable to customers.
When companies do start testing their ideas in this way, they will certainly find that a new approach to management is required. If we’re going to spend four weeks, or even four days, on running a test to learn what will make for a good product, we need to assume that it is at least as likely that the test will result in failure as that it will result in success. We try to ignore both these words and instead focus what every test always generates; learning — and how this is the most valuable commodity.
Some simple analysis of innovation programmes, in fact, tells us that any individual product is much more likely to fail as to succeed, and for every successful product there are hundreds, or thousands, that failed. For all of our best intentions, planning and experience, we will be wrong at least as often as we are right in our ability to predict outcomes. This is hardly the language of corporate business. Imagine if you asked one of your team to predict whether a new software release would go well and they said: ‘Possibly, we’ll see what happens.’ Imagine you asked the manager of your production line whether she expected to produce the same quantities as last month and she replied: ‘I think so. But then again it might be only half as much.’ Emergency meetings would be required; HR would need to be involved. Performance would need to be managed back ‘on track’. If shareholders found out, your CEO would be up against the wall.
So here’s the tricky bit. First, you have to accept that you will always achieve a better end result by testing and learning; that the best instincts of your trusted leaders are simply not reliable enough.
And secondly, once you have made that call, once people have become convinced that products should be the result of methodical experimentation, you must manage the teams and cycles of that work proactively with a keen eye on what is being learned and arm the team with the tools, techniques and motivations that will lead to the right outcomes — better products that customers will love.
An important part of the answer at this stage is to reduce the risk as far as possible. As the writer and consultant Euan Semple argues, the smaller the ‘I’, the less you need to care about ROI (return on investment). Doing low cost experiments reduces the sting when you need to back up and try something different.
- Turning good product ideas into good products. If stage three is about identifying a product that can be built (feasible), will be bought (desirable) and can be sold and operated (viable), then stage four is about carrying out the millions of detailed tasks required to make that product as good as it can be. This is the flawless execution of that idea you now know to be solid.
Here too, businesses can often adopt very dysfunctional behaviours. This is especially true when companies have decided to skip over stage three entirely. That is to say, that ideas have arrived almost complete as designed solutions, and the implementation of that idea — even though there is no evidence that anyone actually wants it, nor that it’s viable or feasible — is seen as the final stage of getting it to market.
Between 2007 and 2009, HMV invested several million pounds into the development of a social network, having declared this intent to the London Stock Exchange (setting stakeholder expectations, of course). Aside from executive hubris, and the fact that MySpace was doing well in the area of youth music, there was no evidence that such a social network would be valued or used by its audience, or that HMV had any ability to make this work. After almost a year of development and a year of operation, the ‘Get Closer’ project was eventually shut down in September 2009. The challenge was that before the HMV project was even started, the executive team had decided on an execution that they simply believed would be successful based on gut feel and confidence in the HMV brand.
But once we’re in this final stage, we may find that traditional management practice can be just as debilitating.
Development of a product is extremely complex. Almost always you will need to combine business design, customer-facing design or service design and technical design. You will then need to integrate multiple work streams, make sure that you’re regularly reviewing progress with stakeholders and customers, and attempt to maintain quality throughout the operation, despite delays and challenges from many sources.
Again, the process tends to be strongly steered towards the predictive end of the spectrum. Managers are often visibly relieved after the uncertainty of the previous phases that the project is now seemingly on certain ground — even if those learning phases have been dramatically curtailed. This is the part of the project where we can construct plans and, if we miss our targets, we should be able to get answers as to why they’ve been missed. Once again we see that managers prefer better understood processes, even where they are not helpful or appropriate.
In The Lean Startup, Eric Reis makes a very good point about the ability to predict your development progress: if you’re building a product that no one wants, it doesn’t really matter if you are on schedule or within budget. And yet the psychology here seems relatively simple to understand. Faced with the huge uncertainty which is intrinsic in any new product development, it is natural to try and focus on those things which are easier to grasp. When surrounded by things which can’t be managed, it’s very tempting to focus on other things that can be — a bit like rearranging the deck chairs on the Titanic.
And, if anything, learning is even less popular during this phase than in previous ones.
The challenge is that we are just as likely, or more likely, to learn about the product, its market and technology during this phase than before. This is not a negative reflection on the proposition development process. It is a reality about the inability of the human brain to predict what people will want, or to know in advance how the development process will turn out.
But more to the point, new information gained during development should clearly not be seen as a threat to a deadline. Such thinking is a very project management-heavy view of the world. The product matters most, and if we find out information during the process which makes the product better, this can only be a good thing.
5.2 Being responsible and spending other people’s money
American humourist and commentator P.J. O’Rourke (borrowing heavily from Milton Friedman) provides a very simple description of the challenge of motivating teams within companies. He describes four ways to spend money:
- You spend your money on You’re motivated to get the thing you want most at the best price. This is the way middle- aged men haggle with Porsche dealers.
- You spend your money on other people. You still want a bargain, but you’re less interested in pleasing the recipient of your This is why children get underwear at Christmas.
- You spend other people’s money on yourself. You get what you want and price no longer matters. The second wives who ride around with the middle-aged men in the Porsches do this kind of spending at Neiman
- You spend other people’s money on other people. And in this case, who gives a sh*t?’
O’Rourke goes on: ‘Most government spending falls into category four. Which is why the government keeps buying us Hoover Dams, B-1 Bombers, raids on Waco cults, and 1972 Federal Water Pollution Control Acts.’
The same logic can apply to unencumbered innovation or product development teams. Would they proceed in quite the same way if they were spending their own money? Would they react to evidence of flaws in their hypotheses differently?
5.3 Human factors
A theme which has emerged frequently in the social media era is why attempts to make Facebook-style communities come to life inside organisations seem doomed to failure. For employers, the appeal of this idea is great. Imagine if staff self-organised online to seek out similarly- minded colleagues. Imagine if they uploaded details of what they were up to so that others could serendipitously stumble across it and help them. Imagine if we could have our cleverest and most ambitious people constantly trying to improve on each other’s work — a kind of semi- public competition to get the best out of each other.
It could be a revolution on the same scale that Facebook has been outside of work.
And there are examples too — early social networks were formed inside companies like Xerox to share information about how to repair devices. Small-scale examples abound of groups using the new technology in new and interesting ways.
The challenge we have seen, though, to transforming these early buds of success to new ways of working are that the behaviours and motivations of those sat behind desks are not necessarily rational, and they are certainly not social in the straight-forward sense.
In Predictably Irrational 12, Dan Ariely draws a sharp distinction between the social norms that govern our daily lives and interactions and the market norms which govern our working life. Various experiments show that as soon as we switch from social norms to market norms, we will become much more insular, self-reliant and much more cautious about what we should and shouldn’t be doing.
There is a reason why those of us who have been in work for a while find it much easier to understand negative or counterproductive work behaviour, such as working slowly or being obstructive. It’s because we have ceased to expect social norms to apply in our office environments, even when outside the office colleagues have a social relationship in which those norms do apply. Have you ever worked with a colleague who is recalcitrant and unhelpful in the office but chatty and supportive off-campus?
The reasons for this should be obvious but can often be obscured by the pretence of a supportive social community.
- People want to keep their jobs. Even if people don’t like their current jobs, they’d rather keep them than lose them. That is, people would like to retain total control over their role in the business, and whilst they’ll resign if and when they’re ready, they don’t want to be fired. In order to do this, people feel they need to be performing, i.e. doing their job not necessarily well, but better than the average performance in the company.
- People would like to earn more, work fewer days a year, have more control over their own schedule and have fewer people telling them what to do. There’s a much longer list than this but these are basically the soft factors that come with being an employee enjoying longer standing and greater respect. There is also a perception (albeit a perverse one) that being further up the corporate ladder increases job security, presumably because it decreases the number of peer-group competitors as the pyramid at the top of most firms gets narrower.
- Status is important in companies. Status comes from being regarded as influential and important within the business. The old-fashioned key to the executive washroom is a brilliant example; there’s little actual benefit but it is a strong and visible signifier of making progress inside an organisation.
So, unlike in social situations, the workplace sees very active competition for various commodities: job security, status, salaries. The most successful operators are those who can gain these commodities without being seen to be fighting too ruthlessly to achieve them. Or to give it its proper name: companies suffer incredible politics.
These three simple starting points explain some very influential and important drivers in business:
5.3.1 Ownership bias — The toothbrush effect and ‘not invented here’
This is the theory that opinions and ideas are likely to be much more valuable to the person who came up with them in the first place. Another name given to this theory is the toothbrush effect on the basis that everyone needs a toothbrush but nobody wants to use anyone else’s. Similarly, we have all witnessed brainstorms where the more alpha the participant, the more territorial they are about their ideas, slogging it out with all- comers to make sure their brainwave is selected and adopted. And, of course, what everyone who receives that idea later might well experience is what an innovation team might call the not invented here bias.
The thought process here is hardly complex to understand. Anyone who’s had an idea praised by others will know the feeling of pride that comes directly from that. In a work context, where the adoption of a person’s idea could lead to a change in the business, then status, security and return are all on the table too.
Although no one wants to be caught putting an idea forward purely because they were the idea’s parent, it is remarkably common to see this happening, and common too to see people desperately trying to cover up their attempts to further their own ideas.
As described in Predictably Irrational, the effect can be used to drive positive as well as negative behaviour. Ariely describes an experiment whereby one set of participants was asked to create a solution to a problem based on a collection of jumbled up words. A second set was asked to adopt an already-completed solution. In fact, the jumbled up words were simply the complete solution the second group received, but in a different order. Invariably, the first group would put the words together to form the same solution as the other group. However, the first group’s attachment to the answer was much stronger — participants would do much more to see it enacted and to protect it from being adapted or varied in anyway. Even the minor act of putting the words together in the right order was enough to create an attachment to a finished idea.
Without exaggeration, we would say it is this particular human trait that can be most toxic in an innovation team if not correctly identified and harnessed.
5.3.2 Opportunity cost
In work situations, if some effort or project does not benefit the employee in some way, it can feel as if it has a negative effect. This is partly real and partly imaginary. Doing something for someone else that has no personal benefit but which may be a good long-term political play may distract time and effort from the potential of things that would otherwise benefit us now. This is what economists term opportunity cost.
What if the alternative to doing something that has no personal benefit is actually to do nothing? In this situation the opportunity cost doesn’t really exist, but then a more primitive driver kicks in, which is to preserve energy and enthusiasm for the next fight, the next project, the next opportunity to benefit. Unless an employee will get caught out and be seen to be engaging in this behaviour, and reprimanded for it, why wouldn’t they go down this route? It would certainly explain much of the apathy that the innovator faces from the rest of the business when trying to move a breakthrough idea forward.
5.3.3 Zero sum
A more divisive, if less common, counterproductive behaviour is actively working against a colleague. Clearly, this is worse than doing nothing: it is actively sabotaging the projects of another. Those new to the workplace can find this sort of behaviour truly shocking. Indeed, it can take a while before recruits are able to recognise such behaviour for what it is, because it seems so counter-intuitive, and that is because it is so unlike the norms that exist outside of business. But in fact it can be quite rational. As we’ve said, the supply of status, benefits and job security is fixed and by reducing the number effectively able to compete for it, our anti-hero effectively improves their chances of a better allocation.
The behaviour is strictly based on a zero sum (you win, I lose) view of the business world.
5.3.4 Perverse estimation and procrastination
When managers ask staff (or indeed, suppliers and partners) to estimate a task, they will insist that the number provided is merely to help forecasting and you will not be held to it. In fact, the suggestion of approximation is there purely to encourage the employee not to hedge, i.e. to inflate the estimate in fear of underestimating it. As soon as the project starts, all estimates will be expected to be solid. Employees will be praised for spending less time than predicted and eyed wearily and with suspicion for doing the opposite. The employee quickly learns to over-egg their estimates. With nothing to lose and everything to gain from mis-estimation, project plans can quickly become vastly bloated and distorted. Optimism vanishes entirely.
Of course, once again, no one wants to be caught doing this, so pessimism is dressed as prudence. This is a very fine line to tread. At what stage does the employee run the risk of looking slow and unproductive? A great deal of delicacy is required.
Once estimates have been received, just how motivated is the employee really to do better than promised? Not very. They should be on time or a little early, but being way too early runs the risk of making estimation seem poor, squeezing future ability to bloat estimates and more to the point, perhaps hastens the next estimation round, which few look forward to. Thus, work behaves similarly to how Boyle’s Law dictates the behaviour of gas: it expands to fill the space (time) available.
5.3.5 Innovation is popular, so long as nothing has to change
As noted above, we’ve never found anyone who is against innovation per se. In words, if not deeds, innovation is extremely popular.
Why, then, do employees oppose innovation in their actions, if not in their words? Here we find the conflict between the realities of work motivation and the powerful motivator of self-image.
When discussing the future, most employees have the nous to understand that the bosses will want optimism. And so, most employees want to present themselves as (and indeed believe themselves to be) dynamic, flexible and unafraid of change. Whether it is true or not is another matter. We know from experience that when placed under a little pressure, most people will fall back to the things they are most comfortable with. Many really aren’t built for innovative work, and particularly for revolutionary projects. They simply find the requisite level of uncertainty too unsettling. Consequently, behaviours tend to bear out what is subconsciously desired; stability and certainty.
5.3.6 Misallocation of resources
In The Innovator’s Dilemma, Clayton Christensen makes a very insightful observation about resource allocation in large companies. No matter what the Chief Executive writes in the annual report, or what the head of each important team says at a conference about the business priorities, it will be a middle manager who in fact makes the resource allocation that decides what the company cares about. Many companies enjoy a military analogy: target markets, aggressive campaigns, guerrilla tactics, and so on. Well, in this analogy, the platoon lieutenant out in the field is setting his own agenda and may in fact be pointing the troops in a totally different direction from the commander’s intent.
Whilst cheerfully acknowledging the company’s supposed direction, such middle managers can reallocate resources towards their own perceived priorities with plenty of air cover (in this case, plausible excuses) based on customer priorities, and so on.
Peculiar they may be, but these corporate behaviours are amongst the least base we have seen. In fact, the middle manager — described as ‘clueless’ in Hugh’s earlier cartoon — may well be making choices they strongly believe are correct for the company and its customers — and in fact, given the day-to-day pressures, seem very prudent and hard to argue with.
More dastardly drivers exist too of course: outright personal rivalry, jealousy, individual vendettas — and worse — form the lower level of non-rational behavioural drivers. Almost all of these types of actions would result in an individual being viewed dimly in a social context. In a work environment, they will be praised and rewarded, especially once they’ve been dressed up in the name of the best interests of the company or its customers.
Economists describe these behaviours as ‘moral hazard’ or the ‘principle-agent problem’. By acting in a short-sighted way in order to maintain their status, employees may have a negative impact on the long-term future of the business, but not one which will impact upon them directly. They are, then, in a position to decide consciously or not whether their chances are better doing the right thing for long term company success, but putting themselves at risk, or doing the wrong thing whilst improving their personal lot. Are they more likely to lose their job through being perceived as poor performers, or through the long-term failure of their business to innovate?
5.4 The structures we build into businesses
Are the structures under which your company operates conducive to new projects in general? How have they supported recent new projects in particular?
The creation of a well-oiled interdependent set of departments in a business is one of the ways in which companies create effective competitive advantage. In order to achieve this, the teams must be able to operate independently. Each team will have its own hierarchy, its own ways of working, and so on. And like all organisations, each department will defend itself against perceived attack. No manager wants to get involved with the unexciting HR euphemisms of downsizing and rationalisation. Equally, any change which threatens a department will be met with subtle and not so subtle responses, a sort of union of individual interests.
We have seen this many times. Promising new ideas will be dismissed because they require other departments to cooperate in delivery, or ideas will be passed around different departments for input until they return barely recognisable. Ever more layers of poorly-considered ideas will be piled on like a Christmas tree overloaded with decorations until it is ready to collapse.
Where a new idea threatens an existing team it may be deliberately amended beyond recognition or pointlessly delayed by calls for further research or study. The larger that team, or the more significant its role in the day-to-day economics of the company, the more those defensive measures will seek not only to kill the new idea, but to silence all talk about it.
‘Organisations are sticky, they struggle to escape the past. Even if you properly divide the labour, it is easy to build a Dedicated Team that acts like a Little Performance Engine (a mirror of the normal business)… .’
In a 2008 talk at the Yale School of Management, Gary T. DiCamillo, a former Chief Executive at Polaroid, said one reason that the company went out of business was that the revenue it was reaping from film sales acted like a blockade to any experimentation with new business models.
‘We knew we needed to change the fan belt, but we couldn’t stop the engine,’ he said. ‘And the reason we couldn’t stop the engine was that instant film was the core of the financial model of this company. It drove all the economics.’
Looking at Polaroid’s competitors, how else do we explain Kodak’s 1996 decision to build, at a cost of around $12bn, a hybrid film and digital camera; the Kodak Advantix Preview, a film camera that allowed images to be previewed? Would the thought that film should be part of the product have even been considered in a business that didn’t have a huge team who had spent years doing nothing but producing and refining film products?
The Kodak engineer who made the invention of the first digital camera is quoted by the New York Times as describing the management reaction, ‘That’s cute — but don’t tell anyone about it’14 because of the threat it posed to the core film business.
In Tracy Kidder’s The Soul of a New Machine,15 he recounts how one long-term Data General engineer, Tom West, was given the chance of a hands-on look at the VAX, the new computer from his fiercest competitor, DEC: ‘Looking into the VAX, West had imagined he saw a diagram of DEC’s corporate organisation.’ The engineer was reassured because the way in which the VAX was designed reflected everything that was wrong with the DEC organisation itself; it was complex, overburdened with unnecessary protocols between different functional elements, and inherently ‘cautious’. DEC’s own product had now become just like the badly communicating, dysfunctional set of competing departments that had worked to design and build it.
5.5 Thinking of marketing as an add-on
Every company has a centre of balance. Sometimes this is in the marketing team — but rarely. More often production, operations and accounts hold sway. I was a member of the Marketing Society for many years and could rely on the debate about why marketing wasn’t sufficiently represented in the boardroom to surface quarterly in the Society’s otherwise excellent publication Market Leader. Perhaps one of the reasons that marketing is sometimes not taken seriously enough is that marketers persist in constantly having this discussion. The other is that marketing teams are better known for execution than strategy, and some marketers lack the ability to correctly position their profession in the context of new product development.
In any case, it is not uncommon for organisations to suggest that their marketing teams get involved in product development only after the project has been more or less completed. Like a kind of glorified packaging team, the marketers are handed a fully-fledged product and asked how they would make it popular.
This is a very effective way to reduce the classic ‘Four Ps of marketing’ — price, product, promotion and place — down to just the one: promotion.
Marketers will often have a strong idea of current market dynamics, who the potential customers are, and where their needs may lie. This perfectly positions them to make expert contributions to the design and definition of product characteristics, distribution and pricing.
In addition, what is learned about the product and its potential audience during the proposition and development phases will be invaluable in launching and marketing the product further down the line. You can’t test a product without testing its marketing. The way the product is positioned and explained is just as much part of a product as its design and build.
At Time Inc., where Fluxx helps run a new product development lab, no product passes muster on the business case unless someone can outline in marketing terms how it is going to find a large enough audience to make it work commercially.